Published at: Old School Value Investing Blog
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Walgreen jumped bout 11% yesterday on the news that it ended it’s dispute with Express Scripts.
If you remember, Walgreen was a bad news pick based on the price drop after the Express Scripts break-up and Alliance Boots acquisition. Although Walgreen did not show up on the BWB 7 Screen, it has a history of strong financials and desirable intrinsic properties.
Yesterday’s response by Mr. Market was nice to see, but long term Walgreen investors are not out of the woods yet. As reported in the Q3 results, “Compared to the prior year, the strategic decision to no longer be part of Express Scripts Pharmacy Network as of January 1, 2012 impacted our quarterly results by a net $0.06 per diluted share including cost controls, at a total of $0.15 per diluted share year-to-date.“. Not only prescription transactions were down(10% in June alone), but revenues on same store sales suffered also(down 4.9% vs. Q2 2012) because those customers were not in the store to shop while they waited for that prescription to be filled.
The question to be answered now is, how many of those lost customers will come back to Walgreen for their prescriptions? CVS Caremark, who benefited from the dispute as an alternate supplier for Express Scripts, expects to retain about 50% of its new customers gained from Walgreen. Customers will return and some will be lost, this is the nature of retail. More importantly, the opportunity for new customers has grown with the return of the Express Scripts subscriber network.
Revenues will return, but not quickly. I expect the remainder of the year’s sales will still be affected by the dispute. Management expected a total loss of $0.21 per share for the year because the loss of the contract. It will be worth watching the Q4 results and seeing how much management attributes to the loss. Based on the numbers they have put out thus far, I would expect to see $0.06 or less tied to the Express Scripts contract dispute.
As for Mr. Market, I expect him to be a little hung over today. Look for the profit takers to exit and the price to drop a little as details emerge on the settlement. Now that the dispute is over with Express Scripts, the growth potential has returned to the domestic market. I still consider Walgreen a long position that will reach its Fair Value price of $45.00 or more.
Disclosure: I am Long WAG
Jinpan International Ltd. (Nasdaq: JST) announced preliminary financial results for the second quarter ended June 30, 2012.
Here are the numbers compared to a year ago same quarter:
| Category | Q2 2012 | Q2 2011 | % Gain/ (Loss) |
| Net sales | 55.6 | 58.3 | (4.6) |
| Gross Profit | 14.5 | 22.2 | (34) |
| Gross as % of Sales | 26% | 38.1% | |
| Net Income | 2.5 | 7.28 | (65) |
| EPS | .15 | .45 | (66) |
Also, per the news release management has amended the 2012 outlook per the following:
The sales number reports from two segments, domestic (China) and international. Domestic sales grew to 50.8M from 46.1M the same quarter last year. International sales took a big hit, 4.8M compared to 12.2M from last year’s second quarter. This was attributed to “…a change in the design by our primary OEM customer of their wind power product(s), which resulted in a decrease in our international sales in the second quarter.”
“Currently, we are waiting for our customer to provide new specifications, so we can make corresponding design changes to our cast resin transformer products and integrate our transformers into their newly designed wind power product(s).” International OEM sales have been down for a three month period and Jinpan is still waiting for specifications from this customer. This may be a flag signaling strained customer relations.
Once these specifications are received, Jinpan will have to modify/redesign their product and have it re-qualified. I would expect this to take some time and possibly affect International sales for the remainder of this year. Management expects this also, “Even though we experienced slower sales to our primary OEM customer, we do expect a pick-up in orders from other OEM customers in the second half of 2012.” This has also exposed a weakness of dependence on one major OEM customer (a 60% decrease in this sales segment due to one customer). I would like to see management move to fix this weakness.
I sensed some hesitation by management about Domestic sales for the remainder of the year also, “We also experienced some weakness in domestic order flows in the second quarter due to a softer economic environment in China.” Domestic sales were actually up by 9.25% this quarter compared to last year, why the warning?
“We have backlog of approximately $113 million at the end of June 2012 and believe that approximately 80% to 90% of the backlog will be shipped in 2012”. I assume that 113M figure is a net sales number. 80% of that would be about 90.5M for the last half of the year in addition to incoming orders. Last year Jinpan had 130.75M revenue over the last half of the year.
The revised numbers for Net Sales predict 0-5% growth this year. Using the worst case scenario of 219M would require Jinpan to achieve Net Sales of 120.6M over the last two quarters. Again, Jinpan had about 130M over the last two quarters for 2011 so it is possible, even more so if the backlog is delivered as promised.
The Gross Margin reduction is not too much of a concern for me. Jinpan has averaged a 38% margin over the last ten years and been in the 33% range three of the same last ten. Also, the net income number if reduced by 20% would be 19M. This is still well above the ten year average of 12.6M and better than seven of the last ten.
“We believe the second half of 2012 will be stronger for our business than the first half.”
Jinpan has some work to do if it wants to be a ‘zero growth company’ this year. There have been some weaknesses exposed regarding reliance on a single customer and possibly customer relations/communications. Jinpan plans to release its second quarter earnings results and conduct an earnings conference call in mid-August. I look forward to seeing how management addresses these issues and handles the remainder of the year, it could reveal a lot about the quality of management.
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